How to Lighten Your Business Tax Liability by Year’s End
James Zahansky, AWMA®
Principal/Managing Partner, Investment Advisor & Chief Goals Strategist
If your small business had a better year than expected, congratulations! But also beware – if your business income significantly exceeds the amount projected when figuring your quarterly estimated tax payments for this year, you could be looking at a big tax bill next April.
But don’t panic. Even with only several weeks left in the year, there are still some things you can do to reduce this year’s tax burden to your business. Here are five strategies to consider.
Accelerate Expenses
Consider making early purchases of deductible supplies, equipment, or services before year’s end. If you know you’re going to incur those expenses next year anyway, choosing to purchase them now instead can lower your overall business tax liability by allowing you to take those deductions in the current tax year.
If you’re expecting to have a high tax bill, having those deductions could divert at least some of those tax dollars back into your business instead. Just be sure to check with your accountant on which purchases will be deductible before you make them.
Delay Income
If your business uses the cash method of accounting (used by many self-employed individuals, sole proprietors, and small partnerships) you could defer income by delaying the billing of clients until next year.
Income is taxable in the year in which it is received, not necessarily in the year in which the goods or services were provided. By delaying your invoicing until after the first of the year, you can push that income into next year instead of having it included in your taxable income for this year. (Just be sure to plan your quarterly estimated tax payments for next year accordingly to take that additional income into account.)
Establish a Retirement Plan
If you don’t already have a retirement plan in place for your business, the end of a profitable year is a great time to get one in place. Retirement savings are essential for both your employees and yourself.
There are a variety of retirement plan options for small businesses that offer not only a way for you and your employees to save for retirement but also some valuable tax advantages for your business.
Employer contributions to employees’ retirement plans are tax deductible, and for the first three years of having the plan your business may also be eligible for a $500 annual business tax credit for setting the plan up.
Even self-employed individuals have an option, the one-participant 401(k) plan, which allows you to save up to $57,000 in total for retirement, tax-deferred. Which plan is right for you will depend on your business and situation.
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Take Advantage of Business Tax Credits
Tax credits are even more valuable than deductions, because they are subtracted from your business income before gross income is determined. There are a variety of tax credits that may be available to your business.
Some examples include:
- tax credits for business purchases (the purchase must have been put into use during the year in which you claim the credit);
- the small business health care tax credit, which is available to small businesses that pay at least half the cost of single coverage for employees;
- tax credits for making certain changes to your business to make it more energy efficient and environmentally friendly;
- the work opportunity tax credit, which is available to employers who hire employees in certain categories such as veterans or certain disadvantaged individuals;
- the access for disabled persons tax credit, which is available to businesses that make changes to the business location to accommodate employees and customers with disabilities;
- and others
Each of these tax credits offer a different credit amount and carry different requirements for eligibility. You should talk with your accountant about which tax credits your business may be eligible to receive.
Don’t Just Plan for Year-End, Plan for Years Out
A successful business requires financial planning not just at tax time, but year-round and long-term as well. At Weiss, Hale and Zahansky Strategic Wealth Advisors we use our proprietary Plan Well, Invest Well, Live Well™strategic process to help business owners get set up for financial success both personally and professionally at every stage of their journey. See how we can help you create a strategic financial plan for you and your business.
Authored by Principal/Managing Partner, James Zahansky, AWMA®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com (http://www.whzwealth.com)
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